SA’s big investment pledges fizzle out
• Coronavirus fallout and lockdown threaten President Cyril Ramaphosa’s economic plans
Fallout from the coronavirus pandemic and the government’s lockdown may threaten President Cyril Ramaphosa’s investment drive, with companies such as Sappi and Growthpoint reviewing spending plans included in the R360bn worth of investment commitments made in 2019.
This is a bad sign for Ramaphosa’s goal of achieving his target of $100bn (about R1.7trillion) in investment over five years, which was announced to much fanfare in 2018.
Fixed investment in SA, particularly in infrastructure, has been a rallying point for Ramaphosa’s administration and is looked at as the linchpin for recovery plans to get SA out of its economic hole.
Global paper and packaging maker Sappi, which announced R14bn worth of expansion projects in the coming six years at 2019’s investment conference, told Business Day the pandemic had interrupted these plans.
“The negative impact of the pandemic, as well as government lockdown decisions in domestic and global markets, means we have had to pull back on capex projects at least until 2022,” CEO Steve Binnie said in response to questions.
The company was busy reviewing all capex plans and would be in a position to determine which projects would proceed only once the “recovery from the pandemic at a domestic and global level becomes clearer”. Instead, the company’s focus is now on preserving liquidity and increasing cash flow, so there has been a reduction in capital expenditure.
Property giant Growthpoint, which completed about R4.8bn in projects over the past two to three years, had postponed about R2.4bn worth of other projects, some of which would probably be scrapped, said its SA CEO, Estienne de Klerk.
Several projects were being re-examined with consideration being given to the extent to which a project might be exposed to a particularly hardhit sector, such as tourism, he said.
Growthpoint was also reviewing certain projects — along with its clients. “In some cases this isn’t a unilateral decision, it’s a bilateral one between a client and ourselves, to post
pone the development because there is so much uncertainty,” he told Business Day.
Some of the projects fell under the investment pledges Growthpoint made at last year’s investment conference, said De Klerk. The firm still had R1bn under construction, but he said projects worth about R230m had been reduced in scope.
De Klerk said the biggest factors for Growthpoint in making these decisions had been the economic conditions and the effect on demand. But the circumstances were compounded by pre-existing challenges, such as ever-rising municipal charges that made developments less feasible. For Growthpoint to return to its precoronavirus investment plans, “we need to start seeing growth in demand”, he said. Instead, vacancies had continued to climb across its industrial, office and retail portfolios. “In this environment, you shouldn’t be building anything new. You should rather be filling the existing vacancies you have.”
The liquor ban, which was reintroduced in mid-July, costing the government billions in lost revenue and feeding a thriving black market, forced global brewing giant AB InBev’s SAB to halt R5bn in planned investment in SA.
Peer Heineken said it was also reassessing investment plans, including the possible establishment of a KwaZuluNatal brewery, due to the ban. The spillover also hit bottle manufacturer Consol Glass, which suspended the construction of a R1.5bn plant in Ekurhuleni. But it is not just private companies that are faced with re-evaluating investment plans.
Airports Company SA (Acsa) has been hammered by the halt in tourism and travel, with its airports all but empty as local airlines barely operate and one of its largest customers, SAA, is grounded during its fraught business rescue process. At 2019’s conference, Acsa had outlined R12.8bn in investment to 2025.
Acsa did not respond to questions, but a recent note from RMB Global Markets Research said that Acsa’s capex spend was going to be limited to less than R1bn a year for the next five to six years.
Transnet – which pledged spending of about R22bn across various expansion projects — said that it would continue with its capex drive, but “at slightly reduced levels”. Actual capital expenditure in the 2020/21 financial year was expected to be at least R5bn less than planned, it said.
Despite the government’s stated commitments to infrastructure investment, the latest of which was the gazetting of 51 “strategic infrastructure projects”, under current constraints a “grand and ambitious, Chinese-style infrastructure drive” was unrealistic, said Nedbank chief economist Nicky Weimar.
There was no denying that SA needed reliable economic infrastructure, but the state should begin with a reliable, cost-effective electricity supply, without which fixed investment was either “not possible or too costly to be feasible”.
The government had not yet tackled important questions about its plans and how they would be financed and implemented, she said.
The government had no record of delivery. Despite lack of capacity and corruption repeatedly identified as key obstacles, “what has changed?”
Public private partnerships (PPPs) were touted as a win-win solution for these seemingly intractable issues, but the lockdown had placed enormous strain on companies’ cash flows, forcing even large firms to cut costs dramatically and secure some form of bridging finance.
Weimar did not believe the $100bn target would be met within five years. Firms would focus on restoring profitability and strengthening balance sheets in years to come. Cutting capex was the fastest way to cut costs to prop up cash flows and restore earnings growth.
The slowdown has already begun. Foreign direct investment into SA fell 15% during 2019, according to UN data. Meanwhile, in the first quarter of 2020, gross-fixed capital formation, an indication of investment, plummeted 20.5% even before the Covid-19 crisis hit SA.
Nedbank’s recent capitalexpenditure project listing, which tracks investment projects, showed that the first half of 2020 recorded the lowest number of projects since the listing started in 1993, and the lowest value since 2001.
And it was likely to remain weak, said Weimar, with a slow recovery expected only from 2022 onwards “if economic growth comes through”.